Positive Arithmetic of the Welfare State

J. Ignacio Conde-Ruiz and Vincenzo Galasso

No 2202, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Why does the largest US welfare programme select its recipients by their age, rather than by their earnings or wealth? In a dynamic efficient overlapping generation economy with earnings heterogeneity, we analyze a welfare system composed of a within-cohort redistribution scheme and an unfunded social security system. The programme's size is determined in a bidimensional majoritarian election. For enough income inequality and elderly in the population, both welfare programs are supported as a structure-induced political equilibrium of a voting game played by successive generation of voters. Social security is sustained by a voting coalition of retirees and low-income young, intragenerational redistribution by low-income young. Two features are crucial: the retirees' political power, deriving from their homogeneous voting, and the intragenerational redistribution component of the social security. Therefore, to assess how changes in inequality affect the welfare state, the income distribution should be decomposed by age groups.

Keywords: Income Equality; Social Security; Structure-Induced Equilibrium (search for similar items in EconPapers)
JEL-codes: D72 H53 H55 (search for similar items in EconPapers)
Date: 1999-08
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Citations: View citations in EconPapers (26)

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Related works:
Journal Article: Positive arithmetic of the welfare state (2005)
Working Paper: Positive Arithmetic of the Welfare State (2000)
Working Paper: Positive Arithmetic of the Welfare State
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